Claiming that it would increase the pace of the U.S. economic recovery, a group of Senators including Senators Harry Reid (D-NV) and Chuck Schumer (D-NY) on Wednesday called for new stimulus measures to be included as part of the ongoing debt ceiling debate. One of the main proposals discussed was an extended and expanded temporary payroll tax deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe. For individuals, some deductions are available to all taxpayers, while others are reserved only for taxpayers who itemize. For businesses, most business expenses are fully and immediately deductible in the year they occur, but others, particularly for capital investment and research and development (R&D), must be deducted over time. .
As part of last December’s budget deal, a portion of employees’ Social Security payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. payments are suspended, reducing the rate from 6.2% to 4.2%. This payroll taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. holiday is reducing federal revenue by an estimated $111.7 billion. The senators’ proposal would extend this deduction for another year.
Although it is clear that economic recovery is not complete, the proposal may not succeed in its intentions. Generally, these frequent “temporary” changes to the tax code also increase uncertainty and threaten to create economic distortions within the economy.
If officials really want to encourage economic growth through tax policy changes, they should pursue comprehensive tax reform. Broadening the tax base and lowering rates would reduce administrative and compliance costs, discourage tax avoidance, and eliminate unjustifiable distortions.
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